Tax Planning Checklist:
With 31 March approaching, now is the ideal time to consider tax issues and, where available, planning opportunities. Key matters are outlined below.
To claim a tax deduction, the debt must be:
o Bad; and
o Physically written off on or before balance date.
The above rules mean you must be able to support that the debt is bad (i.e. you have made reasonable efforts to collect the debt before writing it off).
Companies – Shareholding Continuity & Commonality
The ability to carry forward tax losses is subject to shareholding continuity of 49%. The ability to offset losses against the net income of other group companies requires common shareholding of 66%. The ability to carry forward imputation credits is subject to shareholding continuity of 66%.
Note these tests must always be met and not just at year-end.
If you are anticipating shareholding changes and believe you will breach continuity, forfeited losses can be minimised by accelerating income recognition and minimising deductions where possible. Also, consider the payment of a dividend or making a taxable bonus issue to use imputation credits before they are forfeited.
Broadly, employees are exempt from tax when they are reimbursed or provided with an allowance for work-related expenses.
For travel or relocations, employer provided accommodation or accommodation payments will generally be exempt where the employee is temporarily working away from home for a period of up to two years (or three years in the case of capital projects). Employee meal costs or meal allowances will generally be exempt where the employee is working away from home for a period of up to three months.
The subtleties in these rules present both opportunities and pitfalls to employers. Therefore, we recommend you contact us if you are considering providing accommodation or paying a meal allowance to your employees.
Employers have the choice of either treating all accrued employee remuneration (e.g. bonuses, holiday pay and long service leave) as not deductible in the current year or treating amounts of accrued employee remuneration paid in the 63 days following balance date as deductible in the current year.
We note accrued bonuses paid out within 63 days of balance date may not be tax deductible if there is no evidence a commitment was made to pay the bonus on or before balance date.
Redundancy payments must be paid by year-end for the employer to be able to claim a deduction. That is, the 63-day rule does not apply.
A GST adjustment for non-deductible entertainment must be included as an output tax adjustment in the GST return that covers the earlier of the date the return of income is filed or date the return of income is due. This expense must be added back for income tax purposes.
There is an opportunity available whereby it may not be necessary to make the GST output adjustment. Please contact us if you are interested in finding out more about this.
Review the fixed asset register to ensure the assets exist and to identify assets that are no longer used in order to claim a deduction for the remaining adjusted tax value of the asset.
Assets can be written off if they are no longer used but have not been disposed of, provided:
o The asset is no longer used by you in your business or to produce income and;
o Neither you nor an associated person intends to use the asset in a business or in the future to derive gross income; and
o The cost of disposing of the asset would be more than any proceeds from disposing of the asset; and
o The asset is neither a building nor an asset being depreciated using the pooling method.
o Assets costing $500 or less qualify for an immediate write-off provided:
o They do not form part of some other asset; and
They are not purchased from the same supplier at the same time as another asset and the total is more than $500.
Fringe Benefit Tax
The end of the year is a good time to review any fringe benefits that might be provided to employees that might not have been identified.
The fourth quarter Fringe Benefit Tax return is different to the other Fringe Benefit Tax returns during the year. An alternate rate calculation is either compulsory (for those who used the 43% alternate rate during the year) or is optional (for those who used the 49.25% single rate). If all employees to whom fringe benefits are provided are on the highest income tax bracket, and this option is available, it may be beneficial to continue using the 49.25% single rate.
A close company calculation option is available for vehicles acquired from 1 April 2017. This applies to close companies providing motor vehicles to a shareholder-employee that is available for private use. A close company can make this election for up to two shareholder-employees in the income year in which they purchase the motor vehicle or first start using the motor vehicle for business use. The effect is no FBT is payable, but income tax deductions and GST inputs related to private use are denied.
We can assist in the preparation of Fringe Benefit Tax returns, the filing of a close company calculation option election, or general Fringe Benefit Tax matters if required.
Goods and Services Tax
As part of your year end procedures, a reconciliation between the entity’s GST return and the balance of the GST account in its financial statements should be undertaken. This reconciliation can provide a useful warning about any discrepancies and provide an opportunity to rectify any issues. Also, this reconciliation is generally requested by Inland Revenue as part of their audit procedures.
If there are unreconciled differences, we recommend a GST review be performed to identify possible system issues.
After 1 April, Inland Revenue will be automatically issuing pre-populated income tax returns. Where the individual confirms or Inland Revenue is satisfied the information is correct, a refund or tax bill will be automatically calculated. Due to the risk of error, it would be useful to have any pre-populated income tax returns reviewed by us prior to confirmation.
We recommend a review of inter-company charges be conducted to ensure documentation is in place to support any deductions and to minimise any potential tax risk.
Mixed Use Assets
The tax treatment of real estate (mainly holiday homes), water craft (with a purchase price of more than $50,000) and aircraft (with a purchase price of more than $50,000) where the asset is used for both private use and income earning use and is unused for 62 days or more per year is subject to the mixed-use asset rules. Under the rules, certain losses will be quarantined, and a deduction may only be claimed when the asset derives positive net income.
If the gross income from the mixed-use asset is less than $4,000 per annum, or if you would otherwise have quarantined deductions, the ability exists to opt out from the mixed-use asset regime for that year. This means that income is not subject to tax, but also means that no deductions can be claimed. This concession does not apply to close companies.
Complex interest deductibility rules exist in instances where mixed use assets are held in companies, as well as additional quarantining rules.
If you own mixed use assets, we recommend contacting us to discuss your options.
Payments to Non-Resident Contractors
If payments have been made to non-residents for services performed in New Zealand the non-resident withholding payment rules may apply. There are exemptions available in specific circumstances. Please contact us if you require further information.
All employers with PAYE and ESCT of $50,000 or more per annum need to file employer information returns electronically within two days of payday. Payments continue to need to be made every month or twice a month depending on the size of the employer.
Certain prepayments can be claimed as a tax deduction provided they are expensed for financial reporting purposes. Please contact us if you would like further details.
The final installment of 2020 provisional tax for 31 March balance date taxpayers is due for payment on 7 May 2020. Unlike the first and second installment, if the standard uplift method has been used, use of money interest (UOMI) is charged on deemed underpayments of provisional tax with reference to actual residual income tax (RIT) only where actual RIT is greater than $60,000.
If actual RIT is less than $60,000 and the standard uplift method has been used, then no UOMI applies until the terminal tax due date (7 April 2021 in most cases).
UOMI will apply from the first installment if you or any related entity has either used the estimate method for provisional tax or not paid provisional tax on time using the standard uplift method. UOMI can also apply from the first installment in the first year of business.
Residential Property “Bright-Line Test”
Where residential property is held for five years or less (two years or less if the property was acquired before 29 March 2018), it may be subject to the “bright-line test” with any profits on sale subject to income tax. There is an exemption for the family home in most circumstances.
If you are considering selling residential property held for five years or less, or considering transferring ownership as part of a restructure, we recommend seeking advice first as the rules are complex and the consequences can be significant.
Residential Rental Property Loss Ring Fencing
From the 2019/20 year, losses on residential rental property held on capital account (that is, for long term income derivation) will only be able to be offset against income derived from residential rental properties, either from rental income or the application of the “bright-line test”.
RWT on Dividends
The RWT rate on dividends generally remains at 33%. This means any dividends with imputation credits attached at 28% will generally require a deduction of 5% RWT. This RWT is payable by the 20th of the month following the date of the dividend. However, no RWT is deductible when the recipient is a company at the election of the payer.
From 1 April 2020, additional information will need to be disclosed to Inland Revenue when paying a dividend. The list of information required is comprehensive and is available at https://www.ird.govt.nz/income-tax/withholding-taxes/resident-withholding-tax-rwt/payers/investment-income-reporting/reporting-requirements-from-1-april-2020/payers-of-dividends—reporting-requirements-from-1-april-2020
In light of the Penny and Hooper decision, it is important to ensure that in closely held businesses commercially realistic salaries are paid to any shareholder-employees. Please contact us if you need further help in this area.
Various valuation options are available to you depending on annual turnover and the valuation method used for financial reporting purposes.
In general terms, trading stock, including work in progress, is valued at either cost using a cost valuation method or market selling value when this is lower than cost.
The cost valuation methods include cost, or where permitted, replacement price, or discounted selling price.
To claim a deduction for obsolete or slow-moving stock, it should be physically disposed of on or before 31 March 2020 or valued at market selling value if lower than cost.
Building business resilience to coronavirus - what are your options?
If your business is being severely impacted, is it better to restructure now rather than continue to lose money for an unspecified amount of time? Even if your business isn’t trading directly with China, there are still likely to be implications from the economic fallout coronavirus has created across the globe. The general rule of thumb is to stay the course and look to support Chinese business partners wherever possible.
The broader picture
As New Zealand is so reliant on trade with two major partners, with more than a third of our exports going to China and Australia, we stand to be doubly affected by the economic impacts of coronavirus. This is because Australia’s number one export market is also China, and any downturn in Australia’s earnings is likely to have flow-on effects for New Zealand exporters beyond the loss of the direct Chinese market. China’s neighbours in Asia are also seeing a rise in reported cases, so the effects are likely to continue long-term.
Already businesses in the timber, tourism, hospitality and fresh produce exporting industries are being severely affected by the halt on trade and visitors from China, with crayfish being returned to the sea. As a nation we also rely heavily on imported manufactured items – most of which come from China. Retailers face running out of stock as supplies from China dry up, and other businesses that rely heavily on Chinese suppliers for components or plastic wrap are already concerned about their production schedules and supply.
What can you do?
If Coronavirus isn't brought under control quickly, there are several proactive steps you can take to give your business a stronger chance of recovery:
Support Chinese business partners
It’s taken New Zealand more than 30 years to build up a good trading relationship with China, and the value of that is far greater than a single viral outbreak. While it’s understandable that businesses will want to safeguard their supply chain and export markets, knee-jerk transfers of existing relationships to other markets should be avoided. Instead, consider how your business could support your partners in China if possible, by providing longer payment terms or other such measures. Such supportive treatment will be remembered long after the effects of coronavirus have been forgotten, and your business will be looked on more favourably in future. As Chinese ambassador to New Zealand Wu Xi quoted: “When in prosperity friends know us, and when in adversity we know our friends”. It should also be remembered that this kind of problem is not unique to China. No market is immune from issues like coronavirus.
Speak to creditors
Don’t suffer in silence. Speak to your bank to investigate options for an overdraft or revised payment terms. You will likely find them more receptive given the nature of the issue, which is beyond any business owner’s control. Likewise, ask your landlord about concessions on your rent and discuss repayment options with creditors to provide some relief during the disrupted trading period. The IRD may also be willing to discuss options.
There’s certainly hope that the situation can be resolved without taking drastic measures. However, should the need arise there are a number of restructuring options such as voluntary administration and formal creditor compromises that can ensure a business survives. These are alternatives to liquidation and provide companies with breathing space to organise and deliver a recovery plan for the business and its creditors.
An ounce of prevention is better than cure
Unlike the situation in the wake of the Christchurch earthquakes, there will be no vast rebuild programme to stimulate the economy again once the coronavirus outbreak has abated, and the longer the situation continues, the more likelihood of a global recession. Whatever the future holds, it’s up to business owners to be proactive about managing their cashflow and seeking assistance before it becomes too late.
Taking preventive measures early will give your business the best chance of making a full recovery. We will continue to provide material on how your business can weather the storm.